February’s inflation data was largely in line with economists’ expectations and showed little change from January, though last month’s annual data remained stubbornly above the Federal Reserve’s 2% inflation target. But economists and other experts were already looking ahead to March’s print, which is expected to show the effects on inflation from the United States’ war on Iran.
“Reading too far into today’s CPI in most respects amounts to arguing over the dinner menu on the Titanic, since the economy has struck an energy cost iceberg,” says Brad Conger, Chief Investment Officer at investment firm Hirtle Callaghan.
The U.S. Bureau of Labor Statistics said Wednesday that February’s CPI, which measures the change in prices on a variety of consumer goods and services, rose by a seasonally adjusted 0.3% month-over-month—a hair faster than in January (0.2%) but on par with consensus expectations. That put consumer prices 2.4% higher year-over-year, which also matched economists’ expectations and was level with January’s CPI growth.
“Core” CPI—a measure of inflation that excludes food and energy costs (factors that are more volatile than the other prices tracked by the Labor Department)—remained steady, too. Core CPI for February was just 0.2% higher month-over-month, which was the same as January and December and right where economists expected. On a year-over-year basis, the core CPI rate of 2.4% was a touch softer than projections for 2.5% growth.
Here’s a quick look at February’s key CPI figures—the last before the Iran war (and its effects on global energy markets) is expected to bleed into the data:
- MoM CPI: +0.3% (estimate: +0.3%)
- YoY CPI: +2.4% (estimate: +2.4%)
- MoM Core CPI: +0.2% (estimate: +0.2%)
- YoY Core CPI: +2.4% (estimate: +2.5%)
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“This is a welcomed number on the surface, but one that may already be outdated,” says Alexandra Wilson-Elizondo, Global Co-CIO of Multi-Asset Solutions at Goldman Sachs Asset Management. “February’s data was collected before the conflict in Iran sent crude oil surging roughly 30%, with natural gas, aluminum, fertilizer, freight rates, and shipping insurance moving higher with it.
“The Strait of Hormuz remains the wildcard, and if disruption is sustained, the inflation improvement embedded in today’s print could reverse quickly. That said, no lasting damage to the Strait has been reported thus far. Should the Strait reopen in short order, shut ins can come back online in as little as 48 hours, with full operations restored within zero to four weeks, and the pass-through to inflation would be limited.”
Fuel oil saw the sharpest increase in costs, spiking by 11.1%, which drove energy commodities as a whole 1.1% higher. Utility gas service costs also grew, by 3.1%. Other noteworthy increases in price included apparel (+1.3% month-over-month), gasoline (+0.8%), and medical care services (+0.6%).
The only two areas in which prices actually declined were electricity (-0.7% MoM) and used car and truck prices (-0.4%). But some categories did start to show signs of relief last month.
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“Housing costs, captured by the ‘shelter’ component of CPI, continued to moderate (+0.2% MoM), while broad services prices also showed meaningful deceleration,” says Gargi Chaudhuri, Chief Investment and Portfolio Strategist, Americas at BlackRock. “This has been one of the most encouraging trends in recent months, as shelter has been a component that kept inflation elevated the last few years. Continued easing in this category should help support further gradual progress in overall inflation.
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“Auto-related inflation eased, driven by declines in used car prices and car insurance costs. Airfare prices were broadly in line with the prior month. However, rising jet fuel costs, linked to geopolitical tensions in the Middle East, could put upward pressure on airfares in the coming months.”
Fed Expected to Keep Interest Rates Level
While inflation remained above the Federal Reserve’s 2% target, Wall Street continues to expect that uncertainty about economic data because of the Iran war will stay the hand of America’s central bank, and that the target range for its benchmark interest rate will remain steady at the central bank’s next meeting later this month.
Specifically, the CME FedWatch Tool, which uses trading in federal-funds futures to determine Wall Street’s expectations for future Federal Reserve actions, now shows a 99% chance that the target range for the federal funds rate will stay at its current 3.50% to 3.75% at the conclusion of the next Federal Open Market Committee (FOMC) meeting, scheduled for March 17-18. The figure also barely flinched last week after a surprise loss in February’s jobs report.
“This report alone is unlikely to change the Fed’s calculus for next week’s meeting,” says Jason Pride, Chief of Investment Strategy and Research at Glenmede. “The overwhelming expectation remains that policymakers stay on hold.
“Looking further ahead, one to two rate cuts this year remains a reasonable base case, though the path will depend on the balance between the health of a fragile labor market and potential inflation pressures from the Middle East conflict. But if the geopolitical risk premium currently embedded in energy markets begins to fade, it could give the Fed more room to lean toward supporting a fragile labor market.”
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What the Experts Think About February’s CPI Report
Here, we outline more thoughts from the experts on what last month’s CPI numbers mean for consumers, markets, the Federal Reserve’s future actions, and more:
John Kerschner, Global Head of Securitized Products and Portfolio Manager, Janus Henderson Investors
“The highlight of today’s numbers for us comes from the Owner’s Equivalent Rent (OER) measure coming in at 3.17% on a YoY basis—the lowest level since October 2021—proving that affordability of shelter continues to progress. OER is now at the steady state level that we saw from 2016-2020, once housing had recovered from the Global Financial Crisis (GFC) but before the post-Covid spike in HPA (home price inflation).
Now for the not so good news. PCE inflation on Friday will likely look significantly worse than this morning’s numbers—likely north of 3%—and even more worrisome, headed in the wrong direction. This is a result of PCE inflation focusing on what consumers actually buy (Personal Consumption Expenditures), and thus, PCE has a higher exposure to healthcare, but less on housing. Over the long term, PCE inflation averages approximately 50 basis points less than CPI, but currently we see this relationship flipped, where PCE inflation is approximately 50 basis points higher.”
Josh Jamner, Senior Investment Strategy Analyst, ClearBridge Investments
“CPI printed in-line with consensus expectations for February—a ho-hum release that reflects the period before the escalation of military action in the Middle East that will lift inflation readings next month due to higher energy prices.
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An encouraging sign was the moderation in both core and ‘supercore’ CPI, showing that price pressures were not accelerating into the current oil price shock, which should give policymakers some degree of comfort. Core CPI stayed at 2.5% on a YoY basis—the lowest reading in nearly four years.
With today’s release already largely ‘stale’ due to recent events in the middle east, we expect financial markets to have a limited reaction to this news.”
David Russell, Global Head of Market Strategy, TradeStation
“Steady disinflation on shelter is a good sign, but tariffs seemed to drive up the apparel category. These inflation numbers provide some comfort, but this month’s spike in energy prices make them a relic of the past.
Investors and the Fed are in uncharted territory right now, taking their cues from crude oil and tanker traffic in the Strait of Hormuz.”
Sonu Varghese, Chief Macro Strategist, Carson Group
“CPI inflation for February was along expectations but this is the calm before the storm that will show up due to surging gasoline prices in March. Still, this report does show that the Fed has an inflation problem even if you set aside the energy shock. Tariff impacts are still hitting core goods inflation, while services inflation outside housing remains hot.”
